Lump-Sum Payments

Occasionally, an individual will need (or want) cash for their own use. If the company is in a position to provide cash, it can do so by making a lump-sum payment to the individual in any amount. In Slicing Pie, cash payments reduce at-risk contributions so when a lump -sum payment is made it will reduce the individual’s slices. To make sure the reduction is fair, you should apply the payment in the following way:

First, the lump-sum payment will, in effect, reimburse the individual for cash contributions reducing slices at the cash rate until all cash payments have been reimbursed.

Second, any remaining amount will be applied to the individual’s Well balance, if any. This will not reduce slices, but will decrease the person’s ownership in the Well.

Third, the remainder will be applied to non-cash contributions.

I do not recommend making lump-sum payments in excess of the individual’s total contribution.

By applying the payments in this order, you make the most efficient use of the money and reduce slices appropriately.

For example, Tom is a Grunt who has 4,000 slices and a $1,000 balance in the Well. His slices break down like this assuming his Pie is using the the recommended cash multiplier of four and non-cash multiplier of two:

Contribution

Amount

Slices*

Cash

$250

1,000

Non-Cash

$1,500

3,000

TOTAL

4,000

He asks the company for a lump-sum payment of $1,750.

The payment is applied first to his cash contributions: $1,750 – $250 = $1,500. This eliminates slices from cash contributions:

Contribution

Amount

Slices*

Cash

$0

0

Non-Cash

$1,500

3,000

TOTAL

3,000

Next, the remaining $1,500 is applied to his Well balance which is $1,000 (see above). $1,500 – $1,000 = $500. This does not affect his slices, but does reduce future slices he might get when Well money is used.

It’s logical that cash payments would first cover cash expenses. It’s also logical that if Tom needs money it would come out of the Well. By reducing cash expenses first, you remove slices from the Pie creating a natural disincentive for Tom to ask for lump-sum payments. If you reduced the Well first and allowed the cash slices to remain, Tom would not experience any consequences for asking for the money. Slicing Pie always aligns incentives with the interests of the firm.

If you were to apply the lump-sum to non-cash payments before the Well balance you would be allowing Tom to get slices for paying himself (if the money was drawn from the Well). This actually creates an incentive to ask for the money which is also gaming the system which is not in line with the spirit of the model.

To illustrate this, pretend Tom has $1,000 in the Well and $1,000 in non-cash contributions:

Contribution

Amount

Slices*

Cash

$0

0

Non-Cash

$1,000

2,000

TOTAL

2,000

If you apply the payments to non-cash first, he now has an incentive to ask for a lump-sum payment. The money would eliminate his non-cash contribution:

Contribution

Amount

Slices*

Cash

$0

0

Non-Cash

$0

0

TOTAL

0

But, if the money was drawn out of the Well, Tom would receive slices:

Contribution

Amount

Slices*

Cash

$1,000

4,000

Non-Cash

$0

0

TOTAL

4,000

So, Tom has basically paid himself using Well money which leave less money in the bank and rewards him with twice the slices! This is not fair and, therefore, against the rules of Slicing Pie. Gaming the system would be grounds for termination for cause.

There is nothing wrong with making lump-sum payments to Grunts who need money as long as you apply the payment properly and reduce slices accordingly. Slicing Pie not only ensures a perfect split, but also aligns incentives of all participants.

Hi Mike, a question if I may. Let’s say that a venture doesn’t get to a liquidity event, but does successfully bootstrap, so there no point (theoretically) that the split is locked off. Let’s say that founder A has put in cash of $25k & founder B $15k. There’s now $70k in the bank & enough incoming cash to start paying (smaller) salaries. Should the pie fund return cash contributions to each founder & lock off the split (so as to comply with Australian law). Or should it keep the split running?